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A Strategy Based On Stock Buybacks Continues To Underperform

It seems one key focus of recent commentary has been the buyback activity by companies due to the cash flow benefit resulting from the tax cuts passed late last year.

I have commented on the fact that the increased buyback activity could provide some support for the market and that may well be the case. What has not occurred though is broad outperformance in companies that are instituting buybacks. Invesco now sponsors the exchange traded fund that is comprised of companies instituting buybacks, Invesco BuyBack Achievers ETF (PKW). As outlined by Invesco, the ETF holdings are based on the following characteristics,

The Invesco BuyBack Achievers™ ETF (Fund) is based on the NASDAQ US BuyBack Achievers™ Index (Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to track the performance of companies that meet the requirements to be classified as BuyBack Achievers™. The NASDAQ US BuyBack Achievers Index is comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The Fund and the Index are reconstituted annually in January and rebalanced quarterly in January, April, July and October.

Given the increased buyback activity one might think an index comprised of companies instituting buybacks would be an outperforming one. Not so. Below is a chart detailing the relative return of the buyback index to the S&P 500 Index. When the blue line is trending down, the S&P 500 Index is outperforming. This has been the case since early 2015.

On a longer term basis, or since the end of the financial crisis, the buyback index has had significant outperformance relative to the S&P 500 Index. One could deduce that companies that had the ability to

This article was written by

HORAN Capital Advisors is an SEC registered investment advisor that manages investment portfolios for individuals and institutions. Our firm utilizes a disciplined investing approach that should create wealth for our clients over time. Our investment bias is to invest in companies that generate a steady return over time, i.e., singles and doubles. This singles and doubles approach tends to lead to investments in higher quality dividend growth/cash flow growth companies. On the other hand, there are times when a company's stock price seems to be trading below its fair valuation. Short term gains are possible in these situations. I have been managing investment portfolios for individuals and institutions for over fifteen years and believe investing is like running a marathon and not a sprint. Taking the road less traveled, more often than not, leads to higher returns. Visit: The Blog of HORAN Capital Advisors at (https://horanassoc.com/insights/market-commentary-blog)

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